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RBI squeezes out Rs 36,000 cr from 'system'

IANS
Jan 29, 2010 at 12:00pm IST

Mumbai: The Reserve Bank of India (RBI) on Friday hiked the cash reserve ratio (CRR) for commercial banks by an unexpected 75 basis points, in a clear bid to curb inflationary expectations in the economy.

Cash reserve ratio is the minimum liquid assets banks have to retain against deposits or park with the central bank in the form of government securities. All other policy rates were left unchanged.

The CRR, presently at 5 percent, will be hiked in two stages -- 50 basis points from February 13 and another 25 basis from Feb 27, RBI Governor D Subbarao told the chief executives of commercial banks here.

"As a result of this increase in the CRR, about Rs 36,000 crore of excess liquidity will be absorbed from the system," Subbarao added, as he presented the third quarterly update of the central bank's monetary policy for this fiscal.

Subbarao said the cut in excess liquidity will help anchor inflationary expectations and that the recovery process of the economy will be supported without compromising on price stability.

The unexpected hike in the cash reserve ratio saw the benchmark sensitive index (Sensex) of the Bombay Stock Exchange plummet nearly 325 points, or almost 2 percent, before staging a marginal recovery.

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